Betterment’s new per-advisor fee for custody underlines industry shift
Betterment For Advisors has started charging advisory firms a portion of its custody cost — underlining a shift in how revenue is generated across the industry.
Betterment now charges a monthly fee of $150 per advisor for firms joining the platform, as well as a tiered wrap fee ranging from .12% to .20% of client assets based on the firm’s aggregate assets, according to Jon Mauney, head of Betterment for Advisors.
“We found that introducing a fixed cost, but then lowering our variable costs, is the thing that's going to encourage [advisors] to bring more assets onto the platform,” Mauney told Financial Planning at the company’s New York headquarters.
The 550 firms already on the platform have been grandfathered into the old pricing model — a flat .25% custody fee — but have the option of transitioning to the new model, he says. The company does not break down assets by business, but holds about $22 billion in total.
Mauney says the firm altered its pricing model based on feedback from some of the larger firms on its platform.
“There could be a little sticker shock when you run 25 basis points against $100 million,” Mauney says. At the same time, he notes it was important for the company to be consistent and transparent about its cost, rather than make exceptions for specific firms.
“We instead just opted to come up with a solution that should help all sizes of firms scale with us,” he says.
Betterment’s adjusted pricing strategy comes at a time of fee compression and consolidation among custodians.
Schwab, the largest custodian in terms of number of RIAs and assets on its platform, is purchasing TD Ameritrade. Morgan Stanley recently said it would buy E-Trade, although it has not stated what plans it has for the online brokerage’s Advisor Services unit.
New entrants are also entering the market with their own pricing models. Altruist said it will charge firms $1 per account after the first 100, which are free.
Bernie Clark, head of Schwab Advisor Services, told Financial Planning in a recent interview at the company’s New York corporate office that the firm makes only 15 basis points of revenue per client, with a cost of about nine basis points.
Companies such as Schwab don’t charge for custody, but make a significant portion of their revenue from cash held in client accounts.
Betterment isn’t making any revenue off cash, according to Mauney.
“We automatically reinvest down to the penny every dividend that comes in, and the cashflow that comes in,” he says, noting that the company has permitted fractional share trading and free trading since 2010.
Betterment sees the shifting custody landscape as an opportunity, according to Mauney, who noted the firm has plans to offer more customization to advisors.
Currently Betterment For Advisors has portfolio capability limitations that prevent some firms from using the company as their sole custodian. For example, advisors can’t trade individual stocks on the platform. The company is working on expanding these capabilities, as well as to better integrate its advisor portal with its 401(k) solution, Betterment For Business.
Advisors and RIAs currently custodying at Betterment tend to use models, Mauney says. Betterment offers advisors its own models, as well as third-party alternatives from BlackRock, Vanguard and Goldman Sachs. The robo advisor also offers models from Dimensional Fund Advisors, which allow more customization, according to Mauney.
While the 550 firms on its platform are primarily RIAs, Betterment also services a few broker-dealers and banks. In addition, Betterment has a referral program it offers to firms custodying on its platform, dubbed the Advisor Network, through which it connects advisors with clients of its robo advisor who have expressed a desire to work with a designated financial planner. Unlike custodians such as Schwab, Fidelity and TD Ameritrade, which also have similar programs, Betterment does not charge RIAs for these referrals.
As for the shifting custody landscape, Mauney sees an opportunity for growth.
“I am very confident we will scale better than any of the incumbents,” he says. “That's really what we were built to do.”